A Further Look at the Hansen-Weisbrod-Pechman Debate

Abstract

An intergenerational model of the income distribution, including educational effects, is presented. It is used to analyze issues in the debate over equity effects of subsidies for higher education. In particular, the analysis supports Pechman's view that conventional net benefit calculations are poor indicators of such equity effects. In this Journal [4, 7, 8, 9, 11, 13, 14] and elsewhere [16, references there], Hansen and Weisbrod, Pechman, and others have debated the equity effects of subsidized tuition for higher education. At the heart of the debate are net benefit calculations presented by Hansen and Weisbrod [7]. Pechman's critical view of these calculations may be summarized in his own words [16, p. S256]: The traditional way of looking at the burdens and benefits of higher education is to distribute the net benefits received by students by the income classes of parents (taxpayers). This sweeps the problem created by the intergenerational nature of the benefit transfer under the rug. It seems to me that a more useful way of looking at the problem is to acknowledge that the benefits of public higher education are received by one generation while the costs are paid by another and that there is no way of merging the benefits and costs in one distribution to evaluate the equity of the system. If such net benefit calculations do not measure the equity effects of subsidized tuition, what calculations do? Intuitively, the issue involves comparison of two societies identical in all respects except that one subsidizes higher education more generously. As time passes, will a difference in distributional The author is Professor of Economics, University of California, San Diego. * Richard Attiyeh and two anonymous referees provided most helpful comments. This research was supported by NSF grant SOC74-15238. [Manuscript received May 1975; accepted June 1976.] The Journal of Human Resources * XII * 2 This content downloaded from 157.55.39.207 on Thu, 20 Oct 2016 04:05:27 UTC All use subject to http://about.jstor.org/terms 148 1 THE JOURNAL OF HUMAN RESOURCES equality develop between the societies, and in which direction? Analytically, a natural approach to this question is to construct a complete intergenerational model of the size distribution of income, including higher education variables and tuition subsidy parameters; then to derive income distribution indicators and analyze the sensitivities of the indicators to changes in the subsidy parameters, and, in particular, to see whether distributional inequality increases or decreases with an increase in the rate of subsidization. Sections I and II present an appropriate intergenerational model. In principle, a sufficiently elaborated version of the model, fit to appropriate data, might yield a respectable estimate of the equity effects of higher educational subsidies. However, the appropriate data are not available, and the needed elaborations of the model would be major projects in themselves. Therefore, this paper sets two more modest goals. The first is to propose a promising approach for analyzing the subsidization issue. The second is to use the model in sorting out the logic of the net benefit calculations referred to in the Pechman quotation. Sections III and IV concern the second goal. The model will yield a measure-call it the equity measure-of the sensitivity of income inequality to the level of higher educational subsidy. The equity measure will represent what we would like to know, but cannot estimate directly due to lack of data. The model will also yield a net benefit measure of the sort referred to in the Pechman quotation. The net benefit measure will represent what we can directly estimate from available data (as Hansen and Weisbrod [7] have done). The Hansen-Weisbrod-Pechman debate will be interpreted as a debate over the following proposal: that the net benefit measure be used as a proxy for the equity measure. Hansen and Weisbrod might be identified with the affirmative, Pechman with the negative. It turns out in the model that the equity measure is not well proxied by the net benefit measure, thus favoring Pechman's side. Of course, it should be emphasized that the true debate (as opposed to my characterization of it) is about equity and net benefits in real life, not in a highly simplified model. However, if the logical connection between equity and net benefits does not hold up in a simple economy, it seems improbable that it will hold up in a complicated one.